Enemy at the Gates: Bribery Charges in China Getting Worse For GSK

Recent news reports from the Wall Street Journal about an alleged bribery scheme at GlaxoSmithKline’s (GSK) China operations come on the heels of several arrests of GSK employees, including one foreign executive, on charges of “economic crimes.”  The bribery scheme reportedly involved a plan to pay 48 Chinese doctors to push sales of Botox® and was dubbed the “Vasily” strategy after famed World War II Russian sniper, Vasily Zaytsev, who Jude Law portrayed in the 2001 film, Enemy at the Gates.  A GSK whistleblower is the apparent source for the recent WSJ reports, as well as earlier reports submitted to the Company in January, and may also be responsible for the recent GSK arrests in China.  Although GSK has stated that its internal investigation of the whistleblower’s January allegations found “no evidence of bribery or corruption,” the allegations in the recent WSJ reports are embarrassing and not likely to go away anytime soon.

Background

Just a year after GSK reached a $3 billion settlement with the U.S. Department of Justice on criminal and civil charges of off-label marketing and related unlawful promotion of prescription drugs, an undisclosed number of GSK employees in Shanghai, Beijing and Changsha were arrested at the end of June for “economic crimes,” which local media described as “fraud and bribery.” According to WSJ and GSK statements, an unidentified whistleblower had alerted the Company in January with allegations that between 2004 and 2010 its China sales staff had provided doctors with speaking fees, cash payments, lavish dinners and all-expense-paid trips in return for prescribing GSK drug products, including for off-label uses.  The tipster purportedly confronted GSK with emails documenting the bribery and apparently copied the WSJ.  In explaining the outcome of the Company’s four-month internal investigation, a GSK spokesman stated that paying and/or reimbursing healthcare officials for participating in GSK-sponsored events is permissible and that it is sometimes necessary to advance cash for employee expenses because credit card payments aren’t always possible in many China locations.   Although not inconsistent with the statement, GSK had circulated an internal memorandum in November 2010, stating that it would no longer pay cash directly to doctors for speaker fees.  At around the same time it issued the memorandum, the Company terminated about 20 Shanghai-based sales staff in connection with supposedly inappropriate sales expenses.  However, according to the tipster, the employees were fired for being involved in the bribery scheme.

In 2010, GSK and other big pharma companies were served with subpoenas in connection with a Department of Justice and Securities and Exchange Commission FCPA probe of the pharmaceutical industry.  It is unclear whether the whistleblower described in the WSJ articles had any connection to the Government investigation, the 2010 Shanghai arrests or the more recent sweep.

The Botox® “Vasily” Initiative

While still reeling from the arrests in the recent Chinese sweep, GSK got more bad news when the WSJ went public this past week with the “Vasily” initiative.  According to the Journal, the GSK whistleblower provided the newspaper with internal documents and emails from GSK’s Chinese sales staff that detail a Company strategy to push Botox® sales in China by “targeting” 48 doctors with plans to reward them with either a percentage of the cash value of the prescriptions written or educational credits.  (In 2005, GSK entered into an agreement with Allergan to market Botox® in China).  According to the WSJ, the records the whistleblower provided include:

• A 2013 PowerPoint Presentation that dubbed the Botox® sales strategy “Vasily,” and which included slides stating that the “targeted doctor and hospital need to achieve the sales target . . . If the hospital did not make it, the doctor cannot get bonus even if he made it to the sales target.”
• Documents that described payments to doctors ranging from $245 to $490.
• Emails from late April showing GSK managers reminding the Botox® team to submit Vasily sales data
• Emails showing that at least 16 members of GSK’s China sales staff used their personal email accounts to discuss the Vasily program and other Botox® marketing practices and, worse, emails from managers stating “I recommend that everyone else use a private email account because it will work better that way” and “Remember you must send to personal email accounts, you accidentally sent to [another sales team member’s] public mail, careful next time!”
• Other emails showing Botox® sales staff discussing making small cash payments to doctors ranging from $65 to $160 for transportation and dining costs at conferences and for completing reports about prescriptions.

In response to the WSJ report, GSK has confirmed that the Company was aware of the new allegations and “believe[s] that they come from the same source who has made previous claims of alleged corruption and bribery in our China business . . . [and that] we are investigating these new claims.”

Observations

News of the Vasily program brings additional unwanted attention to GSK’s efforts to gain a stronghold in the burgeoning Chinese market for pharmaceutical sales.  In addition to the recent arrests, the Company reported that it recently fired its R&D chief in China amid charges of data falsification in regard to an article on Interleukin-7 published in Nature Medicine.  Several other employees were reportedly also disciplined in the matter.  So, what’s going on with GSK in China?  Not much different from what we are seeing with other companies in China and other overseas markets.  For example,  Novartis and Abbott Laboratories have also had to deal with similar allegations of improper sales practices in India and other overseas markets.  The FCPA has also put other global pharma giants – including Pfizer and J&J – under the harsh spotlight of alleged bribery activity.

So, assuming for arguments’ sake that these pharmaceutical companies have violated the FCPA’s anti-bribery provisions, why can’t they “just play by the rules”?  Well, because the “official” rules of the U.S. , Chinese and other governments often can’t be reconciled with the business rules as they actually exist in China and other overseas countries.  For example, in China doctors (who are all considered “foreign officials” since the Chinese government runs the healthcare system) earn minimal salaries (about $1250/month according to McKinsey & Co.) and supplement their incomes by collecting payments from patients seeking better treatment and companies seeking to market their products.  Despite Chinese government crackdowns, some hospitals reportedly refuse to use particular drugs unless they receive some form of payment from the manufacturer.

While one could look cynically at the situation in which GSK and other companies find themselves and chalk up the inevitable fines as the “cost of doing business” overseas, and while the U.S. Government can continue keeping its FCPA investigators and prosecutors busy on yet another big pharma investigation, we need a better long term solution.  In my view, taking a doctor to an expensive restaurant in China should be treated the same way as if the restaurant were in Canada.   In other words, the problem is how one defines a “foreign official.”  By allowing the FCPA rules to vary by country  — with one set of rules for free market countries and another set of rules for socialist countries – the only ones smiling more than we cynics are the whistleblowers and their lawyers who will continue to cash-in.